MORTGAGES.

Auckland Star, Volume LXVI, Issue 29, 4 February 1935, Page 9

MORTGAGES.

•?LAN UNSOUND."

MAJOR DEFECTS.

CRITICAL ANALYSIS.

JORPORATION UNNECESSARY' BUSINESS CONFERENCE'S VIEW A highly critical analysis and a round condemnation of the Government's proposals for the establishment of a National , Mortgage Corporation and the rehabilitation of fanners' finance, Lave been made by a national conference of business and financial interests marshalled by the Associated Chambers of Commerce, which makes public its conclusions in i statement issued to-day by the special committee that investigated the questions. This statement has the unanimous approval of the conference and the full concurrence of the executive of the Chambers of Commerce. Represented at the conference were the Associated Chambers of Commerce. Associated Banks, New Zealand Life Insurance Offices Association, New Zealand Law Society, Stock Agents' Association, New Zealand Fire and Accident Underwriters' Council, New Zealand Investors' Protection Association. Building .Societies' Association and investment companies.

The committee is not convinced of the ■ necessity for the establishment of a semi-State mortgage corporation, and it is not sanguine of its success if it is instituted on the Hues proposed by the Government. It regards the proposal as unsound and dangerous. Similarly the rehabilitation proposal, which N the committee insists must be dealt with separately, is regarded as unsound, unjust and' dangerous. Alternative proposals (details of which are published in an adjoining column) are submitted by the committee. Unrelated Proposals. Under its proposals, the statement said, the Government proposed to establish a corporation which would alter the present system of rural and urban finance, and it planned to rehabilitate farmers' finance by readjusting present mortgages to new and undecided levels of land and produce values. The two proposals were not interdependent, and should not be confused. The committees was convinced that it was possible to evolve a scheme for the final adjustment of existing mortgages without creating the proposed mortgage corporation. The scheme had been presented by the Minister of Finance in such a manner as to suggest the two proposals were interlocked. That was definitely not so. The Minister informed the committee that two entirely senarate bills were to be presented to Parliament, and the committee, therefore, dealt separately with the two proposals. It urged that anyone considering the minister's proposals should divorce the mortgage etinniration' froin any scheme for the rehabilitation of farmers' finance.

The committee believe that there were ' no producers who were efficient and competent and who had sufficient equity in their properties who could not borrow at very low rates of interest whatever money they could use profitably on their businesses. Although low prices for primary produce were a factor, probably the main reason for the difficult position of many people in New Zealand to-day was over-borrowing and over-spending, not only by individuals, but by all classes of the community, including local bodies and the Government. When, as a remedy for that position, it was proposed to'increase facilities for borrowing, the public . must . naturally be alarmed. The remedy would seem to be to restrict rather than to expand borrowing.

Political Pressure Feared. The committee deals seriatim with the reasons advanced to justify the creation of a new institution. Its comment is: "The committee does not believe that the mortgage corporation will be able permanently to stabilise Kiortgage interest rates at a low figure. With certain qualifications there is much to be said in favour of an amalgamation of the Crown's mortgage lending activities. In the past there have been cases ot Departments competing in lending, in the view taken on the rehabilitation proposals, which are dealt with separately, there will be no necessity to create any new institution. If settlements are" arranged between mortgagors and mortgagees on a sound basis, the e is to-day, and will contmue to be, ample facilities for the necessary rehnancing. Undoubtedly attempts are made at the present time to bring political influence to bear on the Government Ending Departments. In our opinion the introduction of a'so-called independent boaid of directors will not minimise political pressure on the part o!fct»t-rra-ors. On the contrary, the aggiega tion of mortgages into one ch anne Awl neatly facilitate and accentuate politi cal pressure from mortgagors. Sale of Bonds. The committee said it was unable to see how a substantial reduc ion n the interest rate on farm mo. tgagee would result from operations of cor poration. If the institution couU as Udlctfed; issue bonds on a 34 cent basis, it would have to charge its fanner mortgagors 4J per cent interest or more. Even if the bonds could be eold to tie public on a three per cent basis, winch was lower than the average market yield of Government stocks to-day, it was very doubtful if the corporation could re-lend to its borrowers at substantially less than 4ft per cent. On this basis the amount to be paid half-yea ly bv the borrower would be slignuy higher than the half-yearly payment under the original State Advances tables. At the present time there was a large amount of money available tor investment on mortgage at 4J per een, per annum, and lower. The committee was of opinion that the bonds would not find a ready sale at a low rate oi interest. Unless they could be sold at a low interest rate, the corporation could not lend at a low rate and prosper. In the pamphlet issued by Mr. Coates much criticism had been levelled at the existing mortgage system, and the advantages had been stressed of long-term table mortgages. "The advocates of this system," said the committee, have apparently overlooked the following points: The mortgagor who has, in recent years, been unable to pay his interest in full could not have paid such interest-plus a reduction in. capital in-

debtedness; it has been, and will continue to be, impossible to prevent mortgagors borrowing money on second mortgage to meet first-mortgage interest and repayments of first-mortgage principal. "A substantial part of the mortgage debt in the Dominion is already on a table basis, and it liae for long been possible for the borrower who wished to raise a mortgage on a table basis to do so. We think tliat on investigation ifc would probably be found that in the majority of cases where long-term table mortgages have been entered into, either the property has been sold before the expiration of the term, or alterations and improvement* have so changed conditions that the property has had to be refinanced before the expiry of the term. There are advantages and disadvantages to the borrower under every system of borrowing, and many mortgagors have deliberately, and for sound reasons, adopted the flat mortgage basis. We freely admit that had borrowers in the past' made more extensive use of the table-mortgage system, many who are to-day i>l difficulties would have been in a better position.

"The chief fault of the existing mortgage practice lies not in the system itself but in the fact (admitted in the Minister's pamphlet) that by far the majority of borrowers never dreamt in prosperous times of reducing their mort-oao-e indebtedness, but were content simply to spend (and in some cases eniißilderl handsome earnings and trust to the refinancing of the whole of their mortgage indebtedness when it became due. Many Objections. Wording to the committee, the corporation would inevitably be unw.eldly ;„ size and impossible of wnmd and economic management. It was doubtfn whether there was available the pei - connel with either the vision or practical experience to handle the vast sum.; that would be at the disposal of the riant corporation. The committee aeitea for and obtained a definite nesuranco +l,at neither principal nor interest ot the bonds would be guaranteed by tile State The more successful the corporation was in raisin-r cheap money from the public and lending it to the farmers. thp sreater would be the risk of an inflationary increase in land values and an unjustified speculative boom in land. The greatest care should be taken not ito increase artificially the current I market price of land.

Bv no means satisfied with the provision for the creation of a reserve fund, the committee submitted that the £2..")70,000 worth of local body debentures to be lent to the corporation by the Crown should not figure as a free asset—they really constituted an insuraiHK; fund' to indemnify the bond and shareholders against losses in the early stngee—and it would be wrong in principle and unsound in practice to include the amount in the computation of the maximum permissible bond issue. Coneerning the reserve fund proper, it apparently was not intended that the borrower's contribution of 2 per cent would be paid in cash, but that it would be added to the mortgage to be paid off with interest over the period of the loan. Tt seemed clear that in time of stress that nucleus would not be liquid, and therefore would fail to meet the (iivt requirements of an adequate reserve fund.

The committee considered that the issue of bonds to the extent of 20 times the capital and reserve of the corporation was a larger proportion than was wise and prudent, and was a long way removed from British precedent. An assurance had been received from the Minister that under the legislation the Crown's prerogative would be abrogated and the Crown would rank as a creditor of the corporation part pawn and with other creditors of the same class. That was essential before the bonds could have any hope of commanding the confidence of the investing public. Trustee Investments. As the proposals contemplated that the State—the largest holder at the outset —eventually might hold no bonds, the committee' had suggested that State appointments to the directorate be diminished progressively as the State d'eposed of its corporation bonds, and should cease when the entire holding had been disposed of. Nomination by the Crown of bondholder members of the board would be unsatisfactory, and the committee claimed that there were no insuperable difficulties, as suggested by the Minister, in devising a system of election bv bondholders.

The committee disagreed witli the Minister's statement that the bonds would be trustee investments, and would fully merit that status. How could bonds representing advances up ; to 70 per cent of the value of the mortgaged property be regarded as sound trustee securities? If it were seriously intended, as suggested, to lend, and without limit, againet security over stock and chattels, the value of the bonds would be correspondingly dis-l counted by • investors, and they should j not be designated as trustee security. Such lending, which was highly specialised, should be left to those who had the facilities for dealings with their borrowers and securities, the only power the corporation should have in that respect being the right to take stock and chattel securities from its own mortgagors who were in default. If the bonds were to qualify as a trustee investment, there should be a fixed period of redemption, they should remain relatively stable in value, and they ehould be readily realisable in emergency. The committee believed the bonds would not find favour as trustee investments. Valuation Problem. Grave concern was expressed by the committee at the insuperable difficulties of creating a competent staff to deal with valuations—a problem which, even under the' present system with ite advantages of reciprocal knowledge and contact, was most difficult. The committee doubted whether any system of valuation could be devised which would adequately discriminate between the i competent and the incompetent farmer. Actual production was not the only valuation test to be applied. The valuer must take into account the personal ability of each mortgagor and the quality of the stock at his disposal. If the legislation were to be enacted, the committee emphasised the imperative need of the Government's securing the best possible men not directors of the corporation, bivt as 8 its chief executive officers. At the outset, in the takincr over of the securities of existing Government lendine Departments, the State would in effect be both vendor and purchaser, eince the first board would have been appointed by the State. AVhatever the personal qualifications oi •board members, the conflict of interest made independent judgment impossible. In the view of the committee the involved suspense account propoeal under which the corporation would take over current mortgages of Government DeIpartments was unsound. Why bury the os*es of existing State lending Departments for many years? The States I responsibility regarding existing rnort--1 -raJes ehould not be in any way qualified, land any losses arising from those mort-o-ages should be borne by the State.

Farmers' Funds. Objections to the form of the Government's proposals for the rehabilitation of funnels' finance were set out at length by the committee, whioh, in answering one of the Minister's arguments, said the risk of a really competent and eilicient producer being put off his property was infinitesimal. The best interests of the mortgagee demanded thut euch a man should be kept on his property. It was doubtful whether it was in the interests of the community generally, of the farmere themselves, or of their mortgagees, that incompetent farmers should l>e allowed to remain on their farms producing unecononiically. Mr. L'oate.-.' pamphlet appeared to be based on the novel view that the relationship between present mortgagees and borrowers was one of partnership in sharing losses but not in sharing profits. Many farniere had succeeded in borrowing the full value, and more than the full value, of their properties. It was open to doubt if it be possible to create machinery which would distinguish between those who were worthy of help and tiiose who had arrived in their present situation through incompetence, mismanagement anfl extravagance. While final adjustment of the unsatisfactory mortgage position to-day was desirable,, the committee had grave doubts as to whether final equitable adjustment was feasible. If one could regard the prices of primary products as established, an equitable scheme for final adjustment could be devised. Primary products, however, had always been subject to violent and unexpected fluctuations. An adjustment which might appear equitable on to-day's values might prove to be grossly in- , equitable in even so short a period as 12 months. Discrimination Opposed. The committee contended that in the Bankruptcy Act there was adequate machinery for the settlement of creditors' claims if a person be insolvent. The proper course for a debtor, who was unable to meet his obligations in full, was to effect a compromise with his creditors by mutual arrangement, and failing his' being able to do so, to invoke the protection of the Bankruptcy Act. If the present Mortgagors' Relief Act were repealed to-day, the number of farmers who would find it necessary to file in bankruptcy would be very few; hot only so, but of those who did file, few would be dispossessed of their farms. The conscientious, capable farmer would be almost invariably reinstated by his first mortgagee on the property the moment he got his discharge.

"Assuming that tlicrc is some real necessity for further legislation," the committee added, "we consider the proposals should not l,c limited to one eeotion of the community, namely, tne farmers. If there bo any reason to make special concessions to mortgagors. the committee cannot see any logical reason for discriminating between lariner mortgagors and other mortgagors. Why should not similar concessions be made to struggling country storekeepers, who have done their share toward keeping the farmer on the land, and whose difficulties are largely due to the inability of farmer customers to pay for goods'bought? In the opinion of'the committee, if tlie proposals go through in their present form, they will involve the ultimate bankruptcy of a large number of country storekeepers. Equality of Sacrifice. "If it be necessary that sacrifice should be made to maintain the farming industry, then it should be national ami should'be shared by the whole community. Under tiie rehabilitation proposals as explained in Mr Coates pamphlet, sacrifice is demanded of one class of the community only, namely, the farmers' creditors. The committee stresses that the sacrifice will tall not 'only on mortgagees of land, stock and ! chattels, but also on all the unsecured ; creditors of the rarmers. This principle is unsound and inequitable. Hitherto the special .assistance extended to the farming community has been at the expense of the community at large, and if further special assistance should be criveu it should not be at the expense of the class which has already suffered great losses in the financing of the man on the land.

"The proposal that one class of the community (the farmers' creditors) should bear the cost of the rehabilitation of the fanning industry, is inequitable and unjust. The committee believes that such procedure would have far-reaching effects and would cause widespread distress among many classes, as well as among mortgagees. In the loii" run the effect may very well be further to damage farm credit and ultimately to injure rather than assist those whom the proposals are designed to benefit." " Astounding " Proposal. The committee described as astoundin" the proposal that an insolvent farmer shall be allowed to retain 20 per cent of the value of his assets. The suggestion to allot arbitrarily to a

farmer an equity in his property at the expense of his mortgagees and creditors, could not be justified,' but if any proposal of this nature is given effect, then the amount of .such equity should be determined by an impartial tribunal and should be subject to a modest maximum limit not based on a percentage of a valuation of assets. "What a farce it would be if a farmer with £100,000 of assets, and liabilities exceeding those assets, were allotted, at the expense of his creditors, an equity of £20,000 —a fortune to most people —while the storekeeper with assets of £5000, and liabilities exceeding those assets, had to seek the protection of the Bankruptcy Act, and was nllotteJ a maximum of £50 in personal effects and tools of trade."

The pamphlet was exceedingly vague on the question of the relative rights of various classes of creditors. The committee urged that the established priorities and relative rights of creditors be left untouched. The committee is very strongly of the opinion that the proposal that the Mortgage Corporation lie authorised to take over, at its discretion, existing mortgages, financing these at a low rate of interest, up to an amount not exceeding SO per cent of the security as re-valued, the State accepting a contingent liability for one-eighth of such mortgages, was utterly and totally unsound. Any mortgages taken over by the corporation should lie taken over after revaluation on a sound lending basis without contingent liability, either on the part of tho corporation or any other party. In no case should a private mortgage be taken over without the prior consent of the mortgagee. Mr. Coates had assured the committee that the private mortgagee whose mortgage might be lakeu over would be paid in cash. Court of Review. Holding that the possibility of miscarriage of justice will be great, the committee suggested there should be some right of appeal from the decisions of the proposed Court of Review. That right could be easily provided, and full provision for appeal from the Court of Review to the Court of Appeal should be made.

The power of the Review Court to refuse a stay order in certain cases should not be permissive, but mandatoi'3 T , and there should be the most specific rules laid down for the guidance of the court in that matter.

On the ground that the legislation in the form proposed must result in grave injustice to many email private mortgagees who were depending for their subsistence on income from mortgage investments, the committee urged that the Court of Review should be empowered, when investigating the affairs of a mortgngor, to hear a plea of hardship by the mortgagee, and if it considered it equitable to make an order accordingly. ]t should be mandatory upon the Court of Review, when considering any case brought before it, to have regard to any modification of the original contract which had since January 1, 1930, been onljMttl into by the mortgagor and niortgajPjrby mutual arrangement, and it should lie permitted to disturb such modified contract only if it be clearly shown to be inequitable. If, however, the Legislature determined to adopt the grossly unfair arbitrary equity proposal, the committee urged that* the settlement period be extended to eight years, the settlement then decreed to be final as regarded both parties. The suggestion of an eightyear period eliminated the particularly 'objectionable proposal that the mortgagor should get 50 per cent of the additional value accruing in the second

The pamphlet was silent on the question of what was to happen if the mortgagor effected a sale of the mortgaged property during the period of supervision If of his own accord the farmer disposed of the property during the perio<l a "stay order" was in force, the committee considered that the stay order should cease to operate, and the ordinary processes of law should be allowed to take their course. The farmer in such case should be permitted to take only the surplus left after all his creditors have been paid in full.